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U.S - China Trade War

A trade war, though not so murderous in its ways, can most definitely have its own set of dangerous repercussions. Currently, the ongoing tension between the world’s two most powerful economies has given spotlight to the infamous trade war between the US and China. Though the rivalry has established its role since the accession of China into the WTO, the trade war was initiated in 2018 by and under the Trump administration.

Before we can dive into the effects of the trade war, especially during and in post-COVID times, we must understand the chronology and history behind what has caused it. Relations between the US and China weren’t always troubled. Bush, former president of the United States was a huge advocate of China’s entry into the WTO, and the country relied majorly on China when issuing a large number of bonds to rescue themselves out of the 2008 financial crisis. By giving China the most favoured nation status, Clinton, president at the time, believed more trade would advance the American economy in more ways than one. One of the main reasons as to why China wanted to enter the WTO was to protect itself from being slapped by major tariffs from around the world, having already experienced that when they went against WTO guidelines in the past. In sheer desperation, China agreed to rapidly lower its import tariffs and open its markets, a movement that Clinton claimed would do wonders for the United states of America. However, in the four years after joining the WTO, while China complied with many of its legal obligations, including passing laws and meeting deadlines, it was slow to enforce intellectual property rights and add transparency to its industrial rules and regulations, which made it difficult for U.S. businesses to access its market, and increased the costs to [the US] their economy by billions of dollars. By this time, China had also been accused of using subsidies, tax incentives and an undervalued currency to domestic companies in order to gain an unfair advantage over foreign companies operating in China, especially those of alternative energy; a clear violation of the WTO guidelines once again. Donald Trump, even before coming into office had always been vocal about domestic manufacturing and reducing trade deficit by limiting Chinese imports (through tariffs) and so it came as no surprise that his presidential campaign as well as time in office consisted of beginning the process to do exactly that. Political analyst Josh Rogin even stated that "There was a belief that China would develop a private economy that would prove [to be] compatible with the WTO system.” But Chinese leadership made the political decision to do the opposite, which would force the States to respond- very obviously, foreshadowing a coming trade war.

It was said that the tariffs were based on estimates of the economic damage caused by the supposed theft of intellectual property and foreign-ownership restrictions that required foreign companies to transfer technology. In early 2018, the US came on the heels of tariffs on steel and aluminium imports, the measured target goods including clothing, shoes, and electronics and restriction on some Chinese investment in the United States. Half way through that year, the war escalated even more. The Trump administration imposed fresh tariffs worth $34 billion of Chinese goods. More than eight hundred Chinese products in the industrial and transport sectors, as well as goods such as televisions and medical devices, saw a 25% import tax. China retaliated with tariffs on five hundred plus U.S. products which was also valued around $34 billion including target goods like beef, dairy, seafood, and soybeans. It is important to note that simultaneously, as economic situations got worse between the United states and China, heavy allegations in the name of politics played a role in aggravating their international relations- with the former labelling the latter as a currency manipulator and the latter’s Huawei suing the United States as a whole. At its peak, by the end of last year, the United states had imposed tariffs of more than $360 billion worth of Chinese goods, and China had done the same for around $110 billion worth of American goods.

The “phase one” trade deal came into conversation in mid-December before it was formally signed in January, to be implemented from February onwards. President Trump believed that the high tariff costs imposed on Chinese goods would force the country to come to an agreement that favoured the United states, which is precisely how this trade deal came about. It will effectively relax some tariffs on Chinese imports and over the next two years, obligates China in buying an additional $200 billion worth of American goods, including mainly manufacturing & agricultural goods, and services related to tourism, finance and cloud. China is also to enforce intellectual property protections. This trade deal has been especially controversial, dividing experts around the world based on which country they believe is worse off by the deal. While some have claimed it is the beginning of a (fragile) cease fire, experts say it will be harder for China to meet this commitment [purchase $200 billion worth of US goods] as it stumbles through an economy now haggard by the coronavirus disease. By not cutting their tariffs on American exports before the virus, the goods remain expensive for Chinese consumers. This will reduce market incentives for China’s private sector to purchase US goods and it is expected for the Chinese government to direct its SOEs (state owned enterprises) to pick up the slack. Immediately after the “phase one” deal was signed, a future agreement started budding in talks, especially because the primer deal mentioned nothing about the Chinese government’s extensive subsidies, and still maintained most tariffs. However, any potential progress in negotiations was indefinitely postponed due to the rapid outbreak of the coronavirus. Though, trade tariffs have been eased to offset the damages of the virus on the global economy.

President Trump has begun to risk the inflammation of the trade war once again by threatening to terminate the trade deal if China fails to meet its purchase commitments. With both countries at each other heads in relation to the outbreak of the virus and the damage it has caused in their respective economies, they’re bringing the world to the brink of a new cold war. As mentioned before, the targets for purchase according to the deal were already at an unrealistic level, and with reduced incentives and aggregate demand, these purchases are now close to impossible. Considering one of the main reasons for this harsh rhetoric against China was for his re-elections, president Trump will also face troubles in the incompletion of his goal and may risk leaving office. Marshall Meyer, a professor at UPenn claims that there is an internal rift on trade policy within China itself. As a retaliation of blocking Huawei, and bringing negative light on China as the cause of this pandemic, the Chinese can look to unveil a long-rumoured blacklist of foreign companies, American ones including Apple, Cisco, and Boeing. The Chinese seem to be looking at a “tit for tat” approach towards the brutal actions speared at them. Additionally, the global economy is expected to contract 3% this year which would be its deepest slump since the Great Depression according to the IMF. Recovering from a recession we’ve never seen before would take years, and any strain between two economic superpowers would only make it worse. The trade war, before but especially now, would slow down technological innovation and curb the development of artificial intelligence and 5G mobile networks. With workers and farmers haggled with lockdowns and a global recession, an increase in tariffs should be the least of their worries, which would definitely not be the case as tensions have begun to rise once again, before they were even fully subdued the first time.

In the long run it is definitely a possibility of the two power nations to split into two spheres of influence, one half centred around China and the other around the US, abiding by their standards of governance. Trends in trade dependency show that China’s sphere could incorporate the larger share of the global growth potential. The mystery remains in whether countries caught in the middle, would be able to operate efficiently in both [spheres of influence]. For the time being, the conflict between the two countries is not likely to dissipate any time soon given that it comprises not only economic dimensions, but the political, cultural and military kind as well, beautifully packaged with a thick wrapper of uncertainty.

Author : Saumya Bothra

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